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June 21, 2012

Is It Time to Panic?: Templeton’s Hasenstab

‘I’d like a boring summer for a change, but it doesn’t look like it will happen,’ the bond guru says

“When Michael began at Franklin Templeton, he managed $100 million,” Mansueto added. “Today, he is responsible for a group that oversees $160 billion in assets. The fund that he specifically manages, the Templeton Global Bond Fund, is second only to PIMCO Total Return in its size.”

The soft-spoken Hasenstab then took the stage and quipped, “We’re in a period of incredible uncertainty. I’d like a boring summer for a change, but it doesn’t look like it will happen.

“How should we separate the noise from the really key issues?” Hasenstab (left) rhetorically asked. “More importantly, should we panic?”

A good argument could be made for panicking, he said, especially if you think the European Union will break up and China will have a hard landing; global markets could not absorb either event and “it would make Lehman look like a warm-up.”

“But if we’re able to stay calm, we’ll need to think through the 'tectonic shifts' happening in the world that have largely been masked by the crisis in Greece,” he noted. “Will Greece bring down Europe? Italy and Spain are not Greece. The both have room under their debt-to-GDP ratio cap in which to maneuver. Greece, with its 100% debt-to-GDP ratio, does not.”

Greece could exit the euro, he added, but it would be incredibly expensive for its citizens and lead to hyperinflation and high unemployment. Another bailout from Germany and other countries could also occur, as the first bailout did little to address the underlying fiscal crisis.

“Here in the United States, being a safe haven as well as the world’s reserve currency is something of a curse. It allows politicians here to act irresponsibly without having to experience any short-term pain (although it will be felt long term). This isn’t true of Europe, where they essentially have a gun to their heads. They are making tough decisions that would previously been unheard of.”

As for China, he doesn’t believe a hard landing is in the offing.

“It might happen if they make bad policy decisions, such as poorly thought through fiscal tightening,"he said. "But they’re actually softening at the moment, yet not in a way as to cause a bubble."

China is experiencing a “labor constraint” brought on by the country’s one-child policy, something Hasenstab called a “global game changer.”

“Until now, investment has been the main driver of China's growth. Consumption will be an increasingly important driver of their growth going forward. Can they transfer from lower quality double-digit growth to higher quality single-digit nominal GDP growth? That’s the real question, as every successful developed country has made that transition.”

With those areas addressed, Hasenstab turned to other issues investors should consider—beginning with the possibility of inflation.

“We have this unconventional monetary policy at central banks which are printing money,” he warned. “If this is such a good idea, why weren’t we doing it all along? Between 25% and 30% of global GDP has been printed at banks, so this is by no means at the fringe. We need to think about the consequences of those actions, which will not be felt as much in the United States of Europe, rather in the rest of the world.”

The risk to emerging markets, specifically, is a flood of capital resulting in a “monetary tsunami” in those countries which will present a major challenge. Here in the United States, the debasing of the dollar will lead to an asset base distortion that will put upward pressure on commodities.

But all this risk and uncertainty provide opportunity, he concluded.

“In emerging markets, the tables have turned. Those countries that were once high credit risks, like Indonesia, now look very good, so you should upend your traditional risk models. Also, the United States, Japan and Europe printed money, and don’t look so good. But non-leveraged countries in the rest of the world weren’t printing money, didn’t have an asset bubble and as a consequence didn’t have to deleverage. We like to get yield with little or no credit or interest rate risk. This is why Asia currently looks so good.”

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